Q4 2020 Kirkland's Inc Earnings Call

Good morning, and welcome to Kirkland's fourth quarter 2020 earnings call. All participants will be in listen only mode should you need assistance. Please signal of the conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be and opportunity to ask question to ask a question.

You May press Star then one on you touched on phone and withdraw your question. Please press Star then two please note. The C bench is being recorded I would now like to turn the conference over to Tripp Sullivan of <unk>.

And I see our partners. Please go ahead.

Thank you and good morning, and welcome to Kirkland's Conference call to review results for the fourth quarter of fiscal 2020 on the call. This morning are Woody Woodward, Chief Executive Officer, and Nicole strain Chief Financial Officer at.

Results as well as notice of the accessibility of this conference call and a listen only basis over the internet.

Were announced earlier this morning, and the press release, that's been covered by the nature of media.

Except for historical information discussed during this conference call. The statements made by the company management are forward looking and made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 19 out of thought.

Forward looking statements involve known and unknown risks and uncertainties, which may cause kirkland's actual results and future periods to differ materially from forecasted results and those risks and uncertainties of more fully described the kirkland's filings with the Securities and Exchange Commission and now I'll turn it over to Woody.

Good morning, as we begin I want to thank the entire kirkland's team for their commitment throughout this year and how they work together.

Wherever they were enjoying whatever it takes to produce the results we'll discuss today.

And this was a crazy year in many respects and we were focused force to innovate our people were more than ready to meet the challenge.

We always wanted to finish the year strong and our most important quarter and 2020 with no exception.

The momentum coming into the holidays, where the robust November and then some disruptions and December related to our net.

The new wave of Covid, and then when our new product set and hit the stores and online we saw double digit gains. We've previously disclosed February started off strong as well with a true period, where we were impacted with the wet winter storms, but we've come back from that as well.

At the quarter, we generated a comp increase of one eight per se, which reflects the decline and the store call. It at 36 per cent increase and e-commerce growth GAAP.

GAAP earnings for the quarter were $1 36, and adjusted earnings were $1 40 of that.

It brought us to a dollar of nine and 93, respectively for the year and reversed the sizable losses from a year ago.

We are continuing to evolve into a value oriented specialty retailer, we've been very deliberative deliberate about the pace of our transformation, but we expect the differences, we are making and our assortments will be even more evident in 2021 and it wasn't in the past two years.

I want to walk through the four components of the strategy and describe how we're bringing our customers along with us plus the investments, we're making and technology and infrastructure to support the strategy.

Let's start with direct sourcing we are continuing to mature our direct importing business and achieved our multiyear growth plan. Despite the pandemic related cancellations in 2020 and.

While these cancellations and the impact from Covid, we were on pace to exceed our goal of 20% penetration in 2020.

That being said some of our categories, such as mirrors, textiles, and floral outdoor and gifts.

And our goals for 2021 of our goals to achieve 30 per cent direct sourcing and we have the potential to exceed that of.

Our agents are really hitting their stride and the products look great from Vietnam, China and India.

We've been able to diversify our products by moving our core furniture program from China Vietnam.

We also consolidated our basic mirror program to a true direct from factory day.

And as you've heard us describe before we're investing some of this benefit from sourcing and margin and some of the in design and quality improvements.

And with pricing, we continue to elevate the style and quality and allowing us to gradually increase our overall pricing thresholds in key categories such as furniture.

And we've experienced an increase and who you are with these improvements and a substantial trend here plus the larger penetration of the furniture should keep that growth on the steady path for the next several years.

While we've kept our opening price points, we are slowly growing and a better and best offerings and our customers are quoting yes on the upgrades and style and quality, allowing us to be less promotional and we've also made progress on reducing the discount layering, which was hard for customers to understand and rationalize and price points to make sense.

To the customers and improve our margins we.

We are constantly benchmarking, our competitors and the general market to ensure cartoons of still a strong value player with more style to bring to our customers along with us on this journey.

As it relates to design, our cohesive brand style point of view has allowed us to streamline the aesthetic of our brand. So the customers can mix and match with coffee.

We have invested and specific design projects with an eye towards improved design.

And she and function.

We're also studying the train forward color palette each season, the crosses all facets of the business.

Additionally, we are partnering with third party design support the continued to bring unique yet timeless design and graphics to our assortments as we evolve.

And on quality, we continue to raise the bar and each categories, improving materials and make the furniture of seeing the most significant increase as we redesigned and resource the best selling items can you give the customer and more style and quality at the same day.

Direct sourcing has allowed us to have more control of the craftsmanship of our assortment, while still allowing us to be competitive and pricing.

We've also invested and improved packaging and to reduce damaged product.

If we look back where we were at two years ago as compared with the rest of the home furnishings landscape.

We're in the wrong place and the spectrum.

We had the fact, we had the value pricing, but the quality and style. We are sorely lacking and we certainly didn't have a point of view of about water, we fit in and what can help our customers while I'm hesitant to pinpoint exactly where we are today and the broader home furnishing spectrum, we can still say, we offer tremendous value, but with a much higher level of quality.

The design style of our merchandize and we're supporting the rollout of new merchandise in 2020, one and our biggest initiative on that front is the launch of our loyalty program, which took place in October.

Earlier this month Newsweek named our loyalty program. The number one program of all of homes decor, even with the recognition. We believe there are opportunities continued to continue evolving in 2021 and be at.

The whole operations trends have worked in our favor with people staying at home more and shopping online as well as less store based competition.

At some point there will be headwinds for the industry, but we believe wallet share for home furnishings will remain fairly sizable with consumers at the economy improves.

Another area of our business I want to highlight and our ongoing digital transformation we've.

We've seen the growth continued growth and profitability of E. Commerce, all year and this is a large part of our overall business E. Commerce was 24 per cent of our sales in the quarter compared to 17% a year ago and it continues to be profitable as well.

The specific improvements, we're making and our merchandise requires and we also make specific investments and our technology and infrastructure. In addition to the direct ship from vendor group and the E Commerce hubs I noted last quarter.

For 2021 and beyond we are prioritizing our capital expenditures to continue to fuel our digital transformation.

To help lead the deck, which we've recently brought on my colleague at S. Senior Vice President and Chief Technology Officer, He has vast experience and leading similar digital and technology transformations.

One of items to note.

And of our direct ship from vendor channel before I talk about the stores, we gave a preview last quarter. The we expected to add some select brands. This year to extend where we've been strong and kitchen and tabletop I'm pleased to report that we partnered with brands such as Cuisinart, Kitchenaid, and Viking, which will be added to our website.

These leading brands will only be available on our website and.

And we're very excited about the potential of these brands have on the E Commerce business.

Nicole will get into this and more detail, but I want to call out how successful she's been and leading the charge with rationalizing the store base and negotiating our landlords and ensuring that the new cost structure and we've put in place the sustainable during.

During the fourth quarter, we had 59 less stores than a year ago and total net sales were only down 7%.

We've clearly rationalize the base through more productive stores and and the strength of E. Commerce business is helping to offset the continued challenges in the store traffic and.

Our stores remain a critical component of our omni channel strategy, and and and the maximum expression of the Kirkland's brand and our Assortments that being said, we believe we can improve performance and the stores and that will be and opportunity. We will continue to pursue and 2021 and beyond the.

The strong merchandising the efficiencies and our infrastructure and costs direct sourcing and the growth of e-commerce, all create substantial leverage and our business model the.

Earnings posted during the quarter and for the year were above what we had planned at this time of year ago, but the improvements and cash and liquidity were equally impressive.

A portion of this liquidity at year end was related to the inventory of orders we canceled the early on in the pandemic and.

The call will describe at any moment, we will put some of that liquidity back to work with our inventory number.

Majority of this improvement and cash flow and liquidity. However, what did you the operating costs and we pulled out of the business through cost containment and efficiencies and changes and our labor cost and staffing model.

We will look we looked at benefit from the embedded leverage in the business and 2021, and we'll continue to actively explore the best ways to allocate our capital to fuel additional growth and returns to our shareholders.

The call why don't you walk us through some of the activity and more detail and the adjustments we've made to our strategic and financial goals and thank you already before I get into the details of the quarter I also want to thank the entire for kind of pain, including those on the front lines and our stores and and our distribution centers.

And of pivotal role of pivotal year in the transformation of Brooklyn, and although we are far from the end of our journey, we were able to accelerate and many aspects of our strategy and the past year and it is directly attributed to the dedication of our team.

Although sales trend were inconsistent during the quarter improvement and landed product margin and occupancy cost and operating expense reductions drove the most profitable quarter and our history as the public company. Many of the changes to our model were made and the second quarter and we have shown our ability to sustain and refine them throughout the second half.

Of the year.

Breaking down sales within the quarter.

Had a comp increase of five 3% in November which included early sell through end of holiday product driven by a 49% increase and e-commerce sales, which helped to offset the historical volume and stores on Black Friday and.

In December our comp sales declined by seven 5% driven by a double digit decline in stores and flow or ecommerce growth.

Impacting December was the early sell through of holiday inventory the effect of the rise of Covid cases, and store traffic and slower E. Comm sales due to the early cut off of guaranteed ship windows from parcel carrier limitations and the dropping fulfilled in store online sales.

And January with the seasonal sales timing shifts behind it and the new floor set of everyday merchandise. We had a strong sales month with positive store sales and e-commerce growth of 60%, which resulted in an overall comp increase of 15, 7%.

At strong sales trend continued to start the month of February until we hit the second and third week, which included significant store closures and weather impact of cross more than half of our store footprint.

I'll pick back up at the end of February resulting in a low single digit comp decline.

We expect comp sales to continue to accelerate throughout the first quarter as the compare against the beginning impacts of the pandemic on the economy, followed by our store closures and mid March.

While we still outperformed our segment of shopper track, our comp store traffic sequentially worsen from Q3 levels, particularly in December and due to the reasons I noted a moment ago.

We continue to see the sales benefit of the changes we have made to improve the quality and design of our merchandise as well as category shifts towards higher ticket items.

We did lose some ground on conversion and both store and online.

The inventory shortages and some key category.

E Commerce comp increase continued to be driven by the direct to consumer channel with our third party drop ship revenue at 111% and our own products shipped directly to customers at 45 per cent.

Both of these were offset by the end store fulfilled channel.

And I fulfilled in store for the quarter was just over 36% of ecommerce sales compared to 52 per cent and the prior year, which is the function of consumer preference store traffic and lower and store inventory and.

And profitability upside and our model as the percent fulfilled and store normalize of closer to 45 to 50 per cent.

During the quarter, we closed eight stores, resulting in a count of 373 stores.

During 2020, and we opened no new and closed 59 underperforming stores or <unk> 14 per cent of the store base since the start of the year.

Gross profit was 37 seven per cent of sales compared to 29, 8% and the prior year quarter of.

790 basis point improvement and our gross profit margin Mark the second quarter and a row, we have seen at similar levels of year over year gain.

Of the century 730 basis points was driven by landed product margin from direct sourcing benefit simplifying our promotional message and also reducing the depth of offers and the inherent stacking of entire store couponing.

Throughout the quarter and continuing into the first quarter of 2021.

Inbound freight rate premiums and specifically on products sourced from China have negatively impacted I landed product margin within the fourth quarter of the elevated freight cost accounted for approximately 200 basis points of margin, we expect to see that impact and double in the first quarter of 2021, but still expect the year over year landed margin growth.

Lower store occupancy costs from the closure of underperforming stores and negotiated rent reductions contributed 130 basis points of improvement.

We expect to see and additional 100 150 basis point improvement and occupancy cost in 2020. One this is excluding the much larger benefit and the first quarter and due to the unconquerable sales base.

Lower freight costs from our D C to our stores driven by fewer routes from lower inventory levels and store closures along with the rate decline compared to 2019 added another 70 basis points of improvement.

And you see costs remained relatively flat year over year.

On the prior call I mentioned at the 150 basis points of unfavorable and he and the third quarter due to the timing of inventory and capitalization should reverse in the fourth quarter with improved inventory levels.

And that reversal once that happened throughout the first half of 2021.

We continue to see productivity and infrastructure improvement offset the incremental costs to pick and pack ecommerce orders we.

We saw continued improvement and the output and efficiency of the Q E. Com had we added in 2020 throughout the quarter and are pleased with their performance.

Lastly, other adjustments impacting gross profit and made up of another another 50 basis points.

E Commerce shipping negatively impacted gross profit and the quarter by 190 basis points due to the increase and ship to home channel.

Operating expenses, excluding impairment improved to 23 three per cent of sales compared to 26, 6% and the fourth quarter of 2019, we continue to see the benefit of our cost reductions with the decline in operating expenses of 330 basis points.

And for $10 3 million driven by the more efficient store labor model corporate head count reductions and of justification exercise for all of overhead expenses.

Excluding current year performance related compensation accrual of this represents a 21 per cent reduction and operating expenses, which we continue to expect to be largely sustainable.

A large portion of the reduction and store labor expenses with reducing our minimum staffing and lower volume period and at lower volume stores. The result is at a lower basis point improvement and the higher volume fourth quarter, but at a similar dollar improvement. This is in line with our expectations. When we share the 45 million of operating cost.

And even as we look to accelerate top line growth over the coming years, we will remain disciplined and our cost control.

Store operating expenses decreased 330 basis points as a percentage of total sales driven by the store labor model changes noted and leverage from closing underperforming stores.

And we discussed on the prior call.

We expanded our store operating hours during the peak holiday period, and then return to the reduced hours in January the <unk>.

Standard hours, along with the store sales deleverage and nature of our store labor model changes, resulting in a lower benefit than in prior quarters, which again was expected.

E Comm operating expenses increased 10 basis points as a percentage of total sales the leveraged 120 basis points as a percentage of E com sales and salaries increased by only 100000 of year over year on the $12 3 million dollar growth and revenue.

Advertising expense increased by 300000, or 30 basis points compared to the prior year and we continue to shift our spend heavily towards digital and digital channels.

Corporate operating expenses decreased by 2 million or 50 basis points, driven by reduced headcount reduced corporate office space and the overall expense review performance related comp accruals and the current year account for an additional 70 basis points.

EBITDA, excluding impairment and other minor non operating expenses for the quarter was 34 million or $17 four per cent of sales compared to $16 9 million and the prior year quarter, four and improvement of $17 1 million.

For the quarter, our tax rate was $25 four per cent compared to four 7% and the prior year period, both periods were impacted by a valuation allowance.

The normalized rate of 26% was used and the non-GAAP non-GAAP adjusted calculations for the current year.

And 21 three per cent for the prior year period.

Our earnings per share, excluding non cash impairment normalized tax rate and other minor non operating adjustments was a dollar and 40 cents compared to 62 cents and the prior year.

The GAAP earnings [noise], Inc.

Leading these items was $1 36 compared to a loss of 35 cents and the prior year.

We ended the quarter with the $100 3 million and cash and no outstanding debt, which is the build of $63 1 million from the Q3 level and an increase of $72 million year over year.

And behind with the availability on our revolving credit facility, which is based on our inventory position. We had total liquidity of $139 8 million.

We ended the year with the higher cash balance and we expected, which is partially due to a lower inventory position than expected.

We anticipate the use of cash of 30 to 35 million and the first half of 2021 as we return to the planned inventory levels and more typical working capital timing, but otherwise we expect to remain at a consistent level of cash and no borrowings throughout the year until our normal cash build and the fourth quarter.

Inventory at the end of the quarter was $62 1 million compared to $94 70 million and the prior year or 34% lower we have 14 per cent fewer stores, but were down approximately 18 million to our inventory plan.

We continue to work through vessel and port shipping constraints and see gradual improvements and our inventory position, but now expect the disruptions and our assortment to continue through the first half of fiscal 2021.

The inventory shortages have been and our core everyday products and have been much deeper and some key product categories.

For the fourth quarter, we estimate of comp sales impact of approximately 500 basis points from this key category inventory GAAP, we expect to continue to see of sales impact in those categories and the first half of the year, but expect it to be less and less and the fourth quarter and sequentially improving month to month.

Year to date cash provided by operations was $78 6 million compared to cash the use of $8 3 million and the prior year or a change of $86 8 million.

The improvement is due to better operating performance and the last three quarters of the year, which made up of net improvement of $54 9 million and.

And changes in working capital, which made up $32 million.

The working capital changes are primarily driven by lower inventory levels offset by lower related accounts payable.

Additionally, we received the $12 3 million income tax refund from the cares.

N O L carry back from the second quarter.

Capital expenditures were eight 7 million compared to $15 $7 million and the prior year and were primarily driven by investments and supply chain and E Commerce.

Share repurchases during the quarter were minimal, but we can we will continue to take and opportunistic approach to share repurchases and the future.

We exceeded our progress towards our initial goals set for fiscal 2020, as you'll note and our earnings release, we of increase our profitability targets as we execute the transformation of our business over the next two to three years.

In addition to driving topline growth, we expect continued margin gains and disciplined cost control over this multiyear period to improve our gross profit right to the mid 30 per cent range improve EBITDA margins of the high single to low double digit range and improve operating income margin to the mid to high.

Single digit range relate.

Related to the top line growth, we expect ecommerce to grow annually at a rate of $25 and 35%. During this period and average ticket improvement and stores is expected to offset declining traffic.

We expect direct sourcing to grow from the 20% and fiscal 2020.

250 per cent within this timeframe with the growth spread evenly over the two to three years we.

We continue to believe that our ideal store accounts.

Is in the range of 300 to 350 stores, where we land within that range depends on store profitability and performance as well as consumer consumer shopping preferences post pandemic, but we do expect future store closures to be with the natural lease explorations as we address the majority of underperforming stores this year.

And we continue to strongly believe that our stores are and integral part of our strategy and allow us to represent our style point of view, but also enable us to fulfill of significant per cent of our econ sales and store more profitably then shipping the home.

And lastly from of liquidity perspective of our mingle continues to the maintaining a healthy balance sheet within the model, we expect to generate excess cash annually and we will allocate first the projects to drive growth and or reduce costs, but also of prioritize options to return excess cash to our shareholders and now we're ready for questions.

We will now begin the question and answer session to ask the question you make my stores and one on your Touchtone phone.

Take care of using the speaker phone please pick up your hands at before pressing the keys too.

With the other question. Please press store then too.

At first question today comes from Jeremy Hamblet with Craig Harlem Capital Group.

Thanks, and the congratulations on the 12th of you.

The amount of due to the pandemic.

I wanted to to store that he would look the west and you were mentioning the clue, which was the name of Luis expiration and.

2021, and I wanted to know how many.

Q and and if you have a sense of what kind of of a range of central store closures.

Four of 2021, and then the timing of of.

<unk>.

Yeah, we still at home about 20% to 25% of our leases and that will come up for renewal and part of that is because we continue and some cases to do shorter term leases on some properties that we're continuing to evaluate their performance what I would say that we've made a lot of progress and improving margin and proving the <unk>.

Labour model and and.

Seeing average ticket increases and the store so the way I look at that.

And if I were to give an estimate and now I think the range of of closures could be from five to 15 again, we're going to look as the natural at least explorations come up I think there's also the opportunity that we may relocate a handful of stores. So I would say you know at a space number is probably net and enclosure.

That will continue to get updates and we moved throughout the year.

Great and the in terms of those those negotiations what's the average.

And what the forgetting all of the stores and and the ZIP file person.

Person.

<unk> is at the 10% of the can you give us a sense of the range of the doctor that you're getting on the renegotiating the reason.

Yeah, and the ones that come up for renewal of that we're able to negotiate and we are getting closer to at 20 per cent reduction and it really does vary and I think I mentioned on the last call. If it's a good center and there's there's limited day can see we're locking and for a longer period with al escalation and so in that case, we're not really getting savings ear of.

At a year, but we're not taking the escalations that are embedded and the leafs in some cases, where we have more leverage the the decreases that we're getting are closer to 50 50, 60%. So it really does vary but and and what we've done what we've done so far today and it's about 20 per cent.

Wow, Okay, and then the woman come back to clarify something on the the near term clubs here that you see and Q1, so understand strong store to the month of February followed by some pretty severe weather and your T. Geography's and thank you much of a low single digit comp.

<unk> I wanted to just clarify with the the the month of of February or was that just you know for the last week of February.

It was for the month of February So again double digit positive first week, and then really have two weeks I mean over half of our stores were closed for at least a full day and then the the payload and pack was much larger than that uhm return to positive and the fourth week. So that's for the full month.

Okay, and then I was gonna of the question in terms of the store closures or kind of disrupt the period.

Okay can you quantify the you know.

At the petrol store the for your 300 and.

You know 70 of changed locations <unk>, what's the number of store operating day were lost and the month of of February.

I don't have the actual account, but I do know roughly 175 stores, where it closed at least uhm one to two days and and you know outside of that that doesn't include B. The partial day is at the stores and we're closed or the fact that of store my opened the have very few customers because well.

<unk> <unk> don't have a holistic number I mean, I can say and we were going from the double digit positive too you know and decent double digit and negative comps of it's a pretty significant GAAP and that's two weeks and it seemed to last about seven to 10 days from the holistic point of view the reduction of the people coming in the stores the store clothes.

So it was it was like a three part months the first part good Little park challenging the last word good.

Understood and heard that from a lot of your peers as well.

In terms of thinking about two one I know you didn't put out of formal feel target, but do you have a range of of expectations on your top one and two one.

Yeah, I don't know the rope and we want to put out soon and what's a little bit Crazy with Q1 is the top because we're camping over six weeks. The store closure is eating not really of meaningful pumping. Please I don't know that we one of put out specific guidance I can say that week even.

And with fewer of store closures expect to be from the total sales at least in line with the the first quarter of 2019 at the health.

I'm, sorry say that again.

From my of just total sales dollar perspective to be at least in line with the first quarter of 2019.

Gotcha, Okay. That's helpful 2019.

Perjure, Okay, and then in terms of your Capex expectations four of 2021, I I might have missed that.

And the summer you know I don't think I gave that number I think on previous calls I said between 10 and $15 million I think right now at our 2021 plan would be right and the midpoint of that to 12 to 13 million and I think as we move forward and at least at this point I think that's the same for some.

And can at going forward.

Got it and then what do you I wanted to ask you about the evolution of of your online channel of business, which is.

Is increasing consistently in terms of thinking about the next steps of the.

Business one of the of investments you need to make where the key opportunities in terms of.

Whether it's you know shit from vendor ship the stores your how do we think about what the business is going to look like.

Both of the 2021, but then also the over the next couple of years.

Right well, we we of course love the.

The soccer at this is moving quicker than weird interest you <unk>, mostly driven by customer behavior, we'd always wanted to be and the eventual state of the and the 50 50 range between the commerce and stores, although that's the sillery as of right now and and every part of it seems to be.

Benefit for us so I'm going to start first with our own products, which affect both E. Commerce at in store you know, we're making your product transformation, where we're offering better quality and design and it's <unk>.

Keeping our valued pricing and that seems to be registering both online usually.

And store experience. So one is that our our parked assortment of are migrating and received the three of our customers on the second part of this this phenomena of ship from vendors and which is really and exciting park, we value. The team now the support that and we believe that there's a substantial growth and we can have towards the adding.

Additional layers of of opportunity and the adding the branch like cuisinart or kitchen aid plus of our design and.

That are being held the other vendors and the interests of really stepping up to the plate now or the the choice personal and they would come true and say, we've got something new for you Richie at a different from where we were at before but that business continues to grow and it's such an easy model force because we don't care of the inventory and carry almost zero.

So all of risk is just to make sure the the assortment.

His curated at our website. So the the people that are all of our website and look into the sea.

And it's online and they wouldn't the store, but like I said the store is always going to be our maximum expression of of the bedroom and those are all of the things that we.

The represent our store point of view of price point of view and our call. Your point of view and then we take a little bit more flexibility on our online and expansion and.

And that gives us a lot of a lot of potential.

Potential okay uhm.

Places to growth so yeah.

Yeah, we're really excited we do need to make part of the this whole vehicles.

And give up the digital transformation, we do need to make select investments over the next several years to enhance the experience and make sure that at website works and the most scheme of as possible way and then we will start adding some of the creative bells and whistles as we go along the way right now just making sure the functionally as efficient as possible.

Yeah, just a couple of things to add operational and to support the the growth and the merchandise change and we will over time, either add additional have and or add shit from store to continue to get closer to the customers and we'd your forties parkville costs at more importantly, improve and escalate time, the customer and and then.

Also from the marketing perspective of this year of had a lot of success and and redirecting are spent the digital to acquire new customer and and will continue to push that towards digital acquisition as well to support the merchandise changes when he when he mentioned.

Great color on that and.

I wanted to come back from the gross margins per second because you're really close to the point.

The the better gross margins and two four and then we expected nearly 800 days at this point of your over your improvement.

You know pretty remarkable given and you know the shipping and the complaint.

Headwinds that are being experience, but and.

And that would be the into the the.

Provide a little bit of additional color expectations.

Around.

Whether it's.

The cough shipping, which seems to be running about at close to the 200 basis point drag I assume that that's going to continue but then it sounds like you're occupancy and settling into the kind of this nice range of you know of benefits you know the could be.

Let's call at 150 basis points, a quarter year over year, and then I just wanted to get that clarification and the on your commentary on the the the the cough.

Of course.

And that you should see some improvement from Q3, and how 'bout. The you expect even more improvement and those two the D fees are are ramping up I just could you highlight that again for.

Sure. So at a couple of day of pieces on the E Commerce shipping you're right. It has and the past two quarters of been about 190 basis point drag I think part of that is <unk> of E. Commerce gross that will continue to be of drag on and gross profit, but as our next fulfilled and store and produced store traffic hopes.

Really and the the second half of the fear it shouldn't the.

Percentage dragged should decline on the store occupancy cause at 100, and 150 basis points is the same number to use and 2021 on top of of the games that we had and 2020 and then on the D. C cough and Q3, we had a at and negative timing impact of 150 basis points.

Because our inventory levels dropped and I expected that the flip at the time and queue for because I thought we'd be back on the inventory plan and you know made a little bit of progress, but the majority of that will flip back positively and the first half of 2021, and just as inventory levels get back to you to our plan.

Okay, Great and then in terms of thinking about your product large and opportunities. This year you know your.

Clearly the you know.

There's been a pretty dramatic change in terms of.

You're doing much more direct sourcing and they're of savings that you are keeping some of and sharing.

Quite a bit with your customers, but in terms of thinking about profit margin opportunities. This year, you made such incredible games I wanted to ask just about what you're seeing from of promotional level across your industry from from peers, whether or not that's picking up at all.

And any color you can provide and product March of the expectation.

Yeah. So in the first quarter, if I'm looking at last year of last year's Q1 product margin was and the low 50 per cent too, even though you're expecting the impacted inbound and two double suite of roughly 400 basis points and the first quarter, we still have a fair amount of room.

To have a a four to file from your basic point improvement and landed margin and the first half of the year. So what I would say, though is because of the the tail end that we had from consumer preference and the back half of the year of where and I think we mentioned this before but the seasonal product we sold out of the.

<unk> really early without having to go at a second or third markdowns.

Markdowns, which is part of that part of the plan for that product every year and so I don't think that's something we can cop next year. So I do think direct force and growth will give us some benefit but it will be tough for us to calm the at the margins that we had at least and the third quarter of this year and and I think at.

Will be you know and will continue to be disciplined on our promotional offering but I think they were just from anomalies. This year with the T O and that isn't it isn't something we should've same would continue.

Okay, Great and then just the last one for me in terms of.

Direct sourcing you the cheap about 20 per cent last year, you have of two to three or target of getting the 40 50 per cent.

You know in terms of you know thinking about the progression and it sounds like that's gotta be somewhat evenly with them over that time frame, but are there are more opportunities is 40 to 50 per cent the longer term goal or you know is there you know I think you have.

<unk> have you been substantially higher portions of the business with a direct source uhm.

What are your full of you know any color of the Internet how about at is Jeremy that is such a good question because it's one of our key opportunities for the next two or three years. So yeah. The last year as you mentioned, we get about the 20% penetration this year or target is 30 per cent of it will probably exceed that.

No.

Four of five per cent, which is really exciting for the.

And what's happening is the it takes a while to get an agent structure working around the world and they're just not getting their stride, where we're very impressed of the products of received from them from Maine countries like China, Vietnam, and India, but we're also looking to other countries and those other countries will.

Just help us and them expand our horizon on what the direct import ratio should finally be when we put that target out there at 50 per cent here's more just like a of guidelines. We're gonna pause at 50 and say how do we feel like this is working but we do believe that there's probably outside of the opportunity to increase that but at the.

The reverse side of that is there are some of our domestic vendors are really doing a great job. So they want the business and they come back in and even though at the playing field and some cases. So we don't want to put a number of through that forces us to go Ah direct sourcing, but really as opportunistic I want the the buying teams.

To feel like they have the choice of by the very best product value at the very best style and quality from around the world and sometimes that's here and the U S from of direct and Porter, sometimes it's direct you know overseas relationship sometimes the direct with the factory like we did with are mere program. So we want to have as much flexibility and our model as possible and.

And and so that 50 per cent direct and <unk>, It's just the guidelines and we'll probably exceed the.

Great. Thanks for taking all my questions all of hop out. The other is can I ask from thank you congratulate sure. Thank you.

For the next question will come from John Lloyd <unk> gross.

Good morning.

Good morning crying and.

Oh, congratulations on the year and and all you've been able to accomplish.

Thank you. Thank you.

Would you would you would you start the conversational Mark worse and just the fact that.

And you you you don't you mentioned the the the customer response, we've got and the loyalty up and October.

And.

As you look at you looked at the last of your 18 months of what what do you think the.

The the the major pieces or you've talked about product quality of we've talked about the couponing process and all of that but what do you think the major a couple of pieces or from.

From the consumer's standpoint of how they relate to the of course, I'm brand and might be what you'd seen out of of of loyalty from program since uncle.

Okay. Thanks wrong. Yeah. This is of course of of such as the Dear to my heart because I feel like it's the nucleus of what we could be in the future. It's you know we are what we sell and so making these translations is really even before the aspect of our told growth strategy profitability of strategy and you know kind of like everything we do so.

Uhm, let's start first with the practice forbearance, we took the opportunity and and the last year of your and a half to add some new categories and some of those categories are really hitting their stride and giving us huge growth opportunities the scanned at winter so far as being tabletop. So we were taking our that table top of assortment of and expanding at two.

50 store tests, this year, which almost double of the space allocation, the really will give us insight as to how far we can take the those kinds of the store me.

The really the big wind force over the next several years of redevelopment and and re energizing our core product, where we're seeing that quote probably could come in early even with some of our inventory disruptions, we're getting a really good read where the customers like the direction, we're going we're giving them better quality better point of view from of style.

And point or stores are very colored directed right now so when you walk and you really given the impression of of what we stand for and those core categories and let me repeat what goes might be those quote categories are wall decor, which at one point we were.

Very dominant and I think.

Oh wait a little bit and so it's coming and Roaring back when we were getting your service and the the.

[noise] customers of really responding positively the other one of his furniture, where we had to go through some of them reallocation of our quality and design to make sure that we had a value proposition. So the one of the customer and walked in and they really looked at our product of great.

Great style and quality, but also of a great value and then there's the other categories and we've also had big wins and and then all of the also categories that we had the redeveloped textiles is a bit of a huge win for US are total of business are tabletop textile business any of the Geneva, textiles, and moving some of that innovative.

Designed to India has really been of great play for us, both and the customer acceptance and and product margin.

Other ones, where we're still and the development cycle you know our we've got a good robust.

Uhm candle business, a business and floral of it we're trying to upgrade the quality of and make sure that we're offering more of a solution oriented Jack accessories, instead of really really well for us. So we think about expanding that so overall I think that both of the new products and core products are important for us.

And make sure that by the end of this year or in the physician that you really love what we represent and you know I can unseal critical I walk through our stores and see all of the things of the wrong, but the customers and walk you through the stores and and sitting all of of the things that they like and so I think we have to continue to be extremely critical on ourselves as we make this development.

And like I said and the previous call. If we played three and and the first couple of years will tell you about four and and this year alone. So you'll see some very.

Good substantial progress on our merchandise development and I'm really pleased with the way of the customers or second at.

Great, Thanks, and and just the one on the direct sourcing to go to the 30 per cent and let's see the just give me a sense of the timeline so to move the the 30% is the product we're dealing with the fall shipments or would that'd be spring of 22 shouldn't.

Really all year, we've actually got orders written and to hit or 30 per cent penetration and now we have two of orders to write for the back half of the year. It should help us to see that so I would say of it right now 30 per cent and the bed spread throughout the year and the upside will come by directing some of our Seattle Assortments.

To a higher percentage of direction for it and the background like.

Alright, Thanks, and and one on the model Saddam and to follow Germs question. The sports not just gross margin, but but obviously you you're achieving some of these targets the little all your what would you say.

<unk> I mean, obviously it has something to do with with with the top one but the whereas the other surprise at the 38 per cent gross margin or should I on the call side that you're really hitting some of these through the through your total gets home Oh.

You know I think it's across the board when we and this initially fast at target so much with and no and about.

And we made a lot of changes and the second quarter and you know huge changes to the store staffing model and would there be and issues that came out of that and we had to tweak and and get back you know what with store traffic looks like what like and all of the the individual pieces of <unk>.

I think just across the board and only initially put the that we wanted to make sure. It was something that we could can't and.

And at feed and and you know I've had actually performed the better than than you know even at the top end of what we thought at the time. So it really is just across the board of being able to maintain and that changes that we made seeing and at the.

The N F at from all of the merchandise changes and all of those things and holistically flowing through and and obviously you know the merchandise changes allow us to pull back on discounting pretty significant.

And at 750 average space appoint improvement and landed product margin for two quarters and a row is significant and and is not something that you know we thought we'd get that and make up that much brown and one of my first pet is out of it you know.

Even know the the adjusted targets that we put out of lower than we can't and the fourth.

Fourth quarter and the first half of our year is at as a much different model right now because of the top line volume is quite a bit last thing.

As we continue to execute them merchandise abolition will see the top line growth and for you and then in the first half of the year, specifically because a lot of the changes, we're making art for the decor every day products and having the right offerings and and the first half of the year. So I think for now our model still looks very difficult and and the first half price and the second half of.

And updated target and take that into the account, but that's another piece of art continuing to work on and the model.

Great and last question for me what are your other what's the early on the new loyal to club, but is there any analytics or anything so for.

Through the holiday season of.

And much more spend you got out of the loyalty glove remember the the non loyalty.

Well why don't we do know that the customers or liking of you know like I said, you're on the call. We've got right at the Newsweek of the number one and home furnishings loyalty program and that's just kind of our initial blush, we get so many more things that we can do the the loyalty.

Program to make it more and hands, we are getting some of those analytics at sometimes it's it's hard to tell because.

She was a junior of volatility little clothing stores, we were.

Doing a lot of different things, but we're pleased so far with the with the results of of cultures you of any specifics only I think the one thing that I would say that and that is very encouraging. So you were saying about uhm. So at the reward program at the accumulate.

Accumulate points, you are and a five dollar reward and see about at 50 per cent of redemption of those rewards and in order to redeem and you have to come back within 60 days. So again too early to really say what that means of our trips per customer and spend per customer for the year, but but at that I think is on trend of really be something meaningful.

Right. Thanks for your time and congrats again.

Hey, John.

That concludes our question and answer the question and I would like the hand, the call back over to Mister worldwide for any closing remark.

Well, thank you operator, and and I was always were available for all of our questions over the next several days and weeks and we look forward to seeing you online and and our stores and thank you very much. Thank you.

What kind of and told now concluded. Thank you for attending today's presentation and you may now disconnect.